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 Novartis's $52 billion takeover of U.S.-based eye care giant Alcon,
completed in 2011, saddled it with a business whose sales and profit
have faltered two years running.
Now, Chief Executive Joe Jimenez is reviewing Alcon's surgical
devices and contact lens businesses, suggesting they could be valued
at $25-$35 billion if he unloads them.
The American CEO is also considering disposal of a roughly $14
billion stake in cross-town rival Roche, as well as his
over-the-counter (OTC) drugs venture with GlaxoSmithKline <GSK.L>,
worth some $10 billion.Given Alcon missteps, however, investors are
wary about arming Novartis with a pile of cash, for fear managers
eager to refocus on cancer drugs as they address a sales hit from
patent expiries might blunder into a big takeover.
"We would applaud selling those stakes, generally," said Stephen
Anness of Invesco Perpetual, Novartis's 23rd largest shareholder,
according to Thomson Reuters data.
"But what do you do with that money?" Anness said. "I would be very
cautious about selling stakes...in things to raise a war-chest to go
and do a massive deal, only for that deal to go and be another poor
deal."
To be sure, Jimenez has said Novartis's M&A focus remains on smaller
transactions, including lower-risk drug licensing deals, ranging up
to $5 billion.
Still, Jimenez has not dismissed the notion of a larger transaction.
He suggested last year the Roche stake - amassed during former
chairman and CEO Daniel Vasella's unrequited merger aspirations two
decades ago - could be sold once another, potentially more
significant transaction is lined up to absorb the proceeds. "We’re
always monitoring what’s going on but have not changed our position
regarding our M&A strategy or potential disposals," Novartis
spokesman Michael Willi told Reuters.
PORTFOLIO HOLES
Novartis, which is holding a two-day investor event in Boston on
Tuesday and Wednesday, has portfolio holes a major deal could help
fill.
Where rivals including Roche <ROG.S>, Merck <MRK.N> and
Bristol-Myers Squibb <BMY.N> have immuno-oncology drugs (I-O) on the
market for a range of cancers, Novartis has only investigational
molecules in this hot new therapy area.
Vas Narasimhan, Novartis's drug development chief, could be tempted
to look outside the company, some analysts said, especially as
competitors including AstraZeneca <AZN.L> near approval for their
own I-O molecules.
"We believe that Novartis may be pushed to liquidate assets in order
to finance acquisitions in pharma," said Michael Leuchten, a UBS
analyst.
Speculation that Novartis might buy AstraZeneca sparked a brief jump
in the British company's stock last year. There has also been talk
of its interest in Bristol-Myers.
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PUT OPTION
For its OTC joint venture with GSK that emerged out of their2014
asset swap, Novartis faces a March 2018 deadline to exercise its put
option for its 36.5 percent stake.
People familiar with GSK's thinking confirmed the British group
would be a willing buyer of the stake, which added $234 million to
Novartis's profit last year.
Alcon, whose eye drugs portfolio was moved into Novartis's main
pharmaceuticals unit last year, has been trimmed to include surgical
equipment for conditions like cataracts as well as contact lenses
and solutions.
When Jimenez began his strategic review this year, he said "all
options were on the table". Sales have fallen nine quarters,
necessitating a costly program to arrest the fall.
Even Vasella, who bought Alcon as he sought to build up a European
healthcare giant akin to Johnson & Johnson <JNJ.N>, now acknowledges
the transaction was a mistake.
Alcon's problems have coincided not only with the patent expiration
of its blockbuster cancer drug Gleevec but also with the lackluster
launch of Novartis's new heart failure medicine Entresto, which in
2016 missed sales expectations. Like Alcon, Entresto has forced the
company to step up marketing investments.
A fund manager among Novartis's top-60 investors said the Alcon and
Entresto stumbles raise red flags about managers' ability to tackle
business challenges like a big takeover.
"A big deal might solve some of their issues, but personally I would
prefer to see them doing smaller acquisitions," the investor said.
"A cash mountain of $50 billion would definitely make me nervous."
(Additional reporting by Simon Jessop and Ben Hirschler in London;
editing by Anna Willard)
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